Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

We’ve been hearing a lot about gold over the last few months, related to concerns about inflation, the creditworthiness of various governments, and fallout from the financial crisis—all against the backdrop of what is the most significant increase in inflation-adjusted gold prices since the early 1980s.

The chart below is my way of putting gold prices in perspective.

Over this entire 140-year period, the average price of one ounce of gold was $480 (in 2010 dollars). If the gold price remains stable through the end of this year—not a given by any means—there will have been only one other year in the last 140 (1980) in which the inflation-adjusted average daily price of an ounce of gold was higher than in 2010.

In other words, there was only one year in the last 140 when it would have cost you more in terms of foregone alternative goods and services to become the owner of an ounce of gold.

These data show that during some periods of extreme inflationary or broader economic distress, gold prices have increased sharply, only to recede back to lower levels as things return to normal. For example, from a peak of $563 in 1934 to a low of $201 in 1970, the inflation-adjusted value of gold declined by 64.4%. This is an annualized rate of decline of more than 1% per year over a period of more than 35 years. The inflation-adjusted price of gold was higher in 1871 than it was 100 years later in 1971.

Bottom line: Any value that gold has as an investment appears, historically, to have accrued to investors who had a position prior to certain episodes of economic or financial distress. And to generate truly eye-popping returns from a gold-based strategy, you’d have needed to be selling at the peaks of these past price spikes, not buying.

The basis for making an investment in gold now is a conviction that the worst is yet to come. I’m not saying it can’t happen. But looking at how far these prices have come already, and thinking about the kinds of truly disastrous events that are included in this 140-year period, I’m skeptical.

Note:In the chart above, gold prices are based on the historical “Yearly Average Prices” of the London PM Fix as reported by Kitco. For 2010, the figure used is the year-to-date average of daily data through July 14, 2010. For the period 1871–1912, Consumer Price Index data are the annual average of monthly CPI values reported by Yale economist Robert Shiller. For 1913–2009, the data are annual average numbers from the U.S. Bureau of Labor Statistics. For 2010, the number is the average of monthly values through June 2010. Links to the sites mentioned here will open new browser windows; except where noted, Vanguard accepts no responsibility for content on third-party sites.

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John Ameriks

John Ameriks oversees the Active Equity Group within Vanguard Equity Investment Group, which manages active quantitative equity fund assets. He is one of Vanguard's thought leaders on retirement issues and has conducted studies on a wide range of personal financial decisions, including saving, portfolio allocation, and retirement income strategies. John came to Vanguard in 2003 from the TIAA-CREF Institute, the research and education arm of TIAA-CREF. He graduated from Stanford University with an A.B. and earned a Ph.D. in economics from Columbia University.

Comments

Anonymous | August 7, 2010 4:21 am

I think the point made that Vanguard should offer a gold fund or ETF is on target. There is a place in any balanced portfolio for gold, IMHO. I don’t consider gold producing stocks to be the same as gold itself. They don’t correlate with the price of gold very well and should be considered a different type of investment entirely.

Anonymous | August 7, 2010 12:36 am

Anonymous | August 6, 2010 11:41 pm

A very astute evaluation. Investing is all about guessing, sometimes with history as your friend. The media weigh-ins are not reliable at all, seeing as how most of the media is owned by a few corporations which want to make money by selling their product, hence sometimes wild speculations in the press.

You have products to sell, too; however, you do care about your investors, so they’ll keep returning to your company. Often the media are not so concerned about their readers/viewers, especially when there is money to be made.

Anonymous | August 6, 2010 10:16 pm

All right, so what big disaster caused the run up in gold in the early 80s? I content there doesn’t have to be a disaster to cause a run up in gold prices. It could be, for example, somebody trying to corner the market or a government try to diversify it assets.

Anonymous | August 6, 2010 9:09 pm

As a commodity gold is no different than copper, pork bellies, aluminum or orange juice. Buy when demand is low and sell when demand it high. As a store of value… when the unthinkable comes, who will be buying your mining shares (with presumably worthless dollars) or your gold bars in a vault somewhere (presumably). How many bags of gold coins do you hold and have you proof enough they’re genuine to satisfy the guy with the gun and the bread? Disclaimer… I hold no gold and have not owned a gold stock since I sold my Echo Bay Mines preferred many years ago.

Anonymous | August 6, 2010 6:16 pm

The jury is still out regarding whether the Euro is doomed or not…right now is climbing again day by day against the dollar! As far as US dollar is concerned we are seeing the beginning of the end of the dollar as the official world business currency.
When the end will be in sight (unfortunately not too far in the future) then all bets are off and then for gold the sky will be the limit…..
Let’s be realistic, this is NOT 1890s, 1930s, or even 1960s.

Anonymous | August 6, 2010 4:44 pm

Does anyone know of a fiat currency that has survived longer than 50 years? The only possible exception that I know of would be the island state of Guernsey, however for several reasons (eg. size and dependence on larger countries) it may not be a good example.

Anonymous | August 6, 2010 12:36 pm

The writer says “…gold prices have increased sharply, only to recede back to lower levels as things return to normal.”

Considering international debt levels, Americans’ endorsement, hopefully temporary, of wealth confiscation and redistribution, the goal of buying perpetual incumbency by removing a majority of citizens from responsibility for paying any taxes, the punishment of initiative and wealth creation and innovation, the cost of future entitlements, the current daily attempt to skirt the Constitution, “quantitative easing,” the ongoing deception of the politically manipulated CPI, our dependence on Chinese loans, the question of whether the reaction of the Greek people when a reduction in their entitlements was threatened will soon be coming to my neighborhood, the race and class conflict being stoked by our politicians, the characterization by our president of GM bondholders as “greedy obstructionsts”,the statement by Rep. Pete Stark that the government can essentially do anything it wants to do without restraint from the constitution, the future cost of decent health care, and the threat of nuclear terrorism, I wonder how long it might be before “things return to normal.”

In the interim, people will have to weigh the security they feel from owning some gold against the investment returns they might receive from other assets.

Anonymous | August 6, 2010 11:54 am

Anonymous | August 6, 2010 11:23 am

I am glad to see that that various commenters have caught up with many of the flaws in this posting. If you’d like to see something really eye-opening, overlay a DJIA in 2010 US dollars on its chart. Egad.

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At Vanguard, we’ve always believed in candid, direct communication with investors. In fact, it’s one of our core principles. In 2009, we created the Vanguard Blog so that we could talk about what’s happening in our industry and in the economy—and hear what’s on the minds of investors like you. More

Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.